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ECONOMIC “STIMULUS” FOR DUMMIES

Included among the “dummies” that fail to grasp the complexity & dynamics of a market-based economy are about 95% of the economics profession & virtually all public-sector officials. As such, they believe that more government spending, even if financed by endless borrowing & even if used to support consumption, can “stimulate” real economic activity.

They are right in a banal & trivial sense that the conventional measure of economic activity includes government spending & assigns a disproportionate weight to consumption. Similarly, central bankers pumped in excess liquidity to push up commodity prices or to support business projects made momentarily viable due to artificially-low interest rates.

But an illusory recovery in the present of monetary & fiscal policies is more a cause for worry than for joy since the distortions that drive it will bring economic misery in the future..

Economic stimulus requires real & productive investments that lead to sustainable gains in productivity that lower average costs & rising real wages. Trying to float an economy on an ocean of red ink is like .

For the US economy to be revived in a meaningful way, rather than in an opportunistic political-spin sense, the financial system must be on a sound footing. & that requires removing the perverse incentives arising from government regulations & mandates that create “moral hazard” by encouraging inefficient behavior.

Officials in the Obama administration complain endlessly about banks having received bailout funds from TARP but making “too few” loans to individuals or companies.

But the financial system is operating on La-La-Land logic rather than commercial logic due to the monetary policy of the US Federal Reserve System & fiscal policies of the government.

As such, there are weak incentives for banks to lend to private-sector actor. In setting ridiculously-low interest rates on interbank borrowing, the Fed created the mother of all “carry trades”. & so banks borrow at near-zero short-term interest rates to buy longer-term government securities that pay higher rates with lower risks than lending to private-sector actors.

In all events, political hype is way ahead of the realities of economic fundamentals. This means that many of the new start-ups will be found to be unprofitable when variables like interest rates rise & government spending dries up.

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Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.